March 27, 2017

What OTC will tell us about the state of international oil and gas

Posted by Andrew Bradshaw
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With a growing optimism that the three-year downturn in the fortunes of the international oil and gas industry may be improving, all eyes will be on this year’s Offshore Technical Conference (OTC), which runs from May 1-4 in Houston’s NRG Park.

An indication of how confident or otherwise the industry feels right now will be reflected in the number of visitors who attend the show. Last year, as the price of oil languished around US$40 per barrel for Brent Crude, attendance dipped by more than 26,000 to 68,000 people – the lowest level since the last downturn in 2009. By contrast, a record number of 108,300 visitors attended 2014’s OTC when oil was priced in excess of US$120 per barrel.

The decision at the start of this year by OPEC and a number of other producers, notably Russia, to cap production by 1.8 million barrels of per day to reduce the global oversupply of oil has helped encourage commodity prices and triggered a resurgence in the U.S. shale industry which enjoys lower start up and production costs than the offshore sector.

But there is also a belief that the larger deep water projects will soon follow suit and become competitive with U.S. shale.

At a recent event in Oslo, Rystad Energy, the highly respected oil and gas consulting services and business intelligence firm, suggested that while many offshore projects had been shelved over the past three years because of low oil prices, costs for such projects had come down through measures such as increased efficiencies, particularly in drilling, and resource pooling. Overcapacity in sectors such as drilling and support vessels had led to a fall in contractor pricing of between 20 percent and 25 percent, it was noted. 

 This situation had created a ‘structural cost compression’ that would make offshore projects more attractive in the future.

 It was also reported that costs for deep water projects had reduced by 15 percent and that the downturn in offshore spending, which has declined by 25 percent annually for the past two years, was set to bottom out this year.

By contrast, it was suggested that the U.S. shale sector, which has focused on the most productive wells to reduce operational expenditure in the downturn, would suffer significantly from cost inflations as the industry picks up, echoing similar arguments elsewhere.  

Cost reductions and refinements in field developments offshore have brought break-even prices down to between US$56 and US$58 per barrel in Europe and the Americas. And while there is currently a gap between these break-even values mentioned and the current price of Brent crude, we can expect further efficiency refinements in collaboration and standardisation over the next year to narrow that gap down.

 The organisers of OTC are certainly optimistic about what this year’s show will deliver. OTC chairman Joe Fowler told us: “Since 1969, the world has come to OTC to make critical decisions, share ideas, and develop business partnerships to meet global energy demands.

“In 2017, OTC will uphold its unwavering commitment to delivering attendees unparalleled information on new technologies, global developments, and activities within the offshore sector – regardless of the price per barrel.  At the same time, the not-for-profit event will once again directly benefit the advancement of the energy sector by supporting OTC’s 13 nonprofit sponsoring organisations.”

 Backed by a U.S. administration that is expected to support oil and gas developments (for example, it has been suggested that plans to cut corporate tax rates could free up more than $10 billion a year for U.S. exploration) there is a hope that this year’s OTC will show us the industry is on its way back: re-energised, smarter, leaner and hungry for business once again.